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Moody’s upgrades Pakistan’s banking sector outlook to ‘stable’

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Moody’s Investors Service has upgraded the outlook for Pakistan’s banking sector from “negative” to “stable,” citing the sector’s resilience to macro challenges and the easing of fiscal pressures, allowing it to withstand political turmoil in the country.

According to the credit rating agency’s report, Pakistani banks face persistent external pressures within a challenging operating environment, slightly impacting their loan portfolios. However, the report highlights the banks’ solid profitability, stable funding, and liquidity, providing a sufficient buffer against macroeconomic challenges and political uncertainties.

The report anticipates a return to modest economic growth of 2% in 2024, following subdued activity in 2023, with inflation expected to decrease from 29% to around 23%. Despite high exposure to government securities, comprising around half of total banking assets, the report emphasizes that the credit strength of Pakistani banks is closely tied to the sovereign’s creditworthiness.

Moody’s expects profitability to remain strong due to wide net interest margins but anticipates a decline from 2023 peaks due to subdued business growth, increased funding costs, and elevated taxes. The agency notes that while banks’ modest capital ratios are expected to remain stable, high interest rates and inflation may limit private-sector spending and investment.

The report points out that the problem loan ratio for Pakistani banks rose to 8.5% as of September 2023, attributed to economic shocks and high inflation. Moody’s anticipates the ratio to stabilize at around 9% of gross loans, influenced by the challenging lending environment and the introduction of IFRS 9 accounting standards in 2024.

Moody’s acknowledges stable funding and liquidity as strengths for Pakistani banks, with financial inclusion and remittances from non-resident Pakistanis contributing to domestic deposit inflows. However, it notes rising costs of funds due to a shift from non-interest-bearing to interest-bearing deposits.

The introduction of a Treasury Single Account, requiring government deposits to be held at the State Bank of Pakistan, is expected to have a modest impact on deposit outflows. The report concludes that Pakistani banks, with limited reliance on dollar funding, maintain matched currency positions, and the government exhibits a willingness but limited capacity to support banks, demonstrating the sector’s overall stability.

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